Guide to dividend payments

Diagram: How corporations allocate dividends

Image attribution: Urbanrenewal; CC BY-SA 3.0

Shareholder dividends are a form of monetary distribution most commonly paid to owners of business stock and mutual funds. The dividends for company stock are made from corporate earnings and income earned from mutual funds. In the case of mutual funds, how the dividend is treated depends on the type of investments made by the fund. For example, bond funds are sometimes exempt to state tax because they invest in tax free bonds. In the case of corporations, the issuance or increase of a dividend sometimes leads to an increase in stock trading activity.

Corporate dividends are issued by boards of directors, and increases or decreases to dividend amounts are typically announced via quarterly reports. To qualify for a dividend payment the shareholder has to own the shares by a specific date. This date is called the record date. In addition to owning the shares by the record date, the shareholder must hold the shares until the ex-dividend date, the day of dividend distribution.

When dividend payments are made, they are either deposited directly into a Federal Deposit Insurance Corporation (FDIC) insured account such as a money market account or a FDIC defined non-insured investment sweep account. As an alternative to having funds deposited into a sweep account, dividends can be reinvested into the issuing corporation via a Dividend Reinvestment Plan or DRIP. Dividends may also be paid into retirement accounts and life insurance polices that hold shares in either stocks or mutual funds.

Qualified dividends

Qualified dividends are paid to investors at a lower tax rate and generally dividends issued by U.S. Corporations. Moreover, qualified dividends are taxed at a maximum rate of 15 percent per the Internal Revenue Service (IRS). Income earners in the lowest tax bracket pay less than 15 percent according to the brokerage firm Fidelity Investments. Qualified dividends earnings are are reported on a Form 1099-Div that is typically sent to taxpayers in January of each year and use for tax filing purposes on IRS Schedule-D.

Ordinary dividends

The IRS describes ordinary dividends as payments made from the earnings of corporations that do not qualify for the net capital gains tax rate. One such qualification is the holding period of shares. For example, when shares are not held by investors for a certain amount of time they are paid as ordinary dividends. According to Fairmark, mutual funds that are owned for 60 days or less don't qualify for lower tax rates. Since ordinary dividends are not subject to a maximum of 15 percent tax, they are taxed at the regular income tax rate.

Special dividends

Special dividends are usually one time, larger than average dividends paid to shareholders when corporations have extra earnings. In the case of public companies, these dividends are reported to the Securities and Exchange Commission (SEC) using a Form 8-K. It is important to note that share prices can drop proportionate to the size of the dividend on the ex-dividend date. For example, if Company A has a share price of $100 and issues a $10 special dividend per share on January 26, then the share price opens for trading at $90 on that ex dividend date, it is most likely due to the special dividend according to the Motley Fool.

Best Small Cap Stocks That Pay Dividends

A 'Small-Cap' stock has a share price that after being multiplied by the share float amounts to between $300 million and $2 billion in value. Several small-cap stocks currently have dividend values in excess of 10 percent.(1)

Defining what the 'best' among these small-cap stocks is a little more subjective. This is because stock performance can be evaluated using a wide range of indicators and metrics making the evaluation as good as the tools used to make the assessment. Having said that, here is a list of 5 stocks that issue high dividends.

1. Administradora de Fondos de Pen (PVD) 11.10 percent

When assessing the performance of the above small-cap company, one can begin with annual revenue. For example, Administradorea de Fondos de Pen had a huge jump in revenue between 2008-2009; more specifically from $278.233 million to $213.609 billion.(1) This kind of revenue jump could be  a one time jump or an indicator of the company's capacity to generate growth. Annual revenue however, is just the tip of the iceberg when it comes ot performance evaluation.

2. Alon Holdings (BSI) 12.40 percent

12.40 percent may seem like an attractive dividend, and it is in relation to many stocks with lower dividends. Alon Holdings also maintained stable revenue during 2008 and 2009 and is in the black for a number of metrics including return on equity, profit margin and operating margin as of August, 2010. Keep in mind, share volume has been quite low for this company.

3. Anworth Mortgage Asset Corporation (ANH) 14.50 percent

Dividend yields as high as the one for this company make it potentially profitable if share values don't decline more than the value made possible through the dividend. In a sense the high dividend is a hedge against the companies' performance and share price. If the company can maintain its share price, a 14.50 percent dividend represents an interesting small-cap investment.

4. Apollo Investment Corporation (AINV) 11.20 percent

Apollo Investment Corporation is fairly valued at a an August 11, 2010 price of $9.36 per share if one considers book value an indicator of fair valuation. That is to say, as of this date, Apollo's price to book values was .96. This could be good if the Forward Price to Earnings Ratio wasn't quite so low at  8.35. Nevertheless, profit margin of 77.66% and operating margin of 66.40% may warrant a second look at this company.

5. BGC Partners, Inc. (BGCP) 10.30 percent

To reduce the need for a dividend hedge, and increase the estimated probability of potential return on investment, one would do well to look at more than just an eye-catching dividend but the company itself. BGC Partners' 52 week price range as of August  11, 2010 was between $3.72 and $6.97; this means if bought at its highest price and sold at its lowest , a little over 53% of  one's capital investment would be lost. This would wipe out any benefits from a dividend so assuming a revisit of 52 week price lows doesn't occur, a purchase of this company remains hedged at a $6.97 purchase price until the price reaches approximately $6.25.

Summary

If an investor is looking at dividends alone, a high dividend could mean a good stock, but in most cases it is unwise to determine a company's investment worth purely on dividend. Such being the case, other more fundamental factors become important in assessing what the best stocks with high dividends actually are. The companies in this article are not necessarily the best companies with high dividends, but may under some financial conditions present an investment opportunity that is among the best of small-cap companies with high dividends.

Source: http://yhoo.it/4sm5Xi (Yahoo finance)